A Tale of Two Economies: US & Europe

While a relative calm has settled in global equity and bond markets this week, news flow picked up at the end of the week around the developing divergence in some macroeconomic trends for the US versus Europe. The recent data suggests tariffs are starting to have a stagflationary impact in the US, while inflation in Europe appears to be better contained. A few key economic indicators support this narrative:

• Hard US data is starting to reflect the impact of tariffs on the US economy. Wednesday’s payroll data showed a sharp slowdown in private sector hiring and follows the recent downward trend over the last three months. Broader signs of economic strain are also emerging, with Institute for Supply Management (ISM) data showing a contraction in the services sector and jobless claims reaching an eight-month high. This stands in stark contrast to a stabilising European economic outlook.

• The European Central Bank (ECB) cut interest rates for the eurozone, while suggesting the end of the interest ‘rate cutting cycle’. This is significant as it potentially marks the end of the eurozone's high-inflation era seen over the past few years. In contrast, U.S. inflation has been ticking up, with an uncertain outlook from the US Central Bank, the Federal Reserve (The Fed). This signals a cautiously optimistic outlook for the eurozone, reinforcing the growing divergence from the more fragile U.S. inflation picture.

• The dollar remains under pressure: While currency volatility also remains subdued in recent sessions, the trend in USD weakness against global currencies remains intact. Since the start of the month, the dollar index is down 0.4% (at time of writing). This index compares the dollar to major currencies, primarily the euro. As the euro gains modest support on improved inflation and policy clarity, the dollar’s slump underscores the widening transatlantic divergence.

While the US data has been incrementally negative, it has helped to calm the bond market, and we note that US equity markets have ticked up (0.6%) this week and the bond market has been relatively flat at time of writing.

The Noise

• Bond markets experienced mixed movements this week, with U.S. Treasury yields generally declining amid weaker economic data and easing trade tensions. In contrast, eurozone government bond yields rose slightly following the ECB’s rate cut and signals of a pause in further easing.

• Equity markets were quietly optimistic this week, with global markets continuing their recovery from April’s drawdown, up 2.5% since the beginning of the year (in GBP). Investor optimism was buoyed by potential U.S-China trade negotiations and anticipated European interest rate cuts.

• The UK has seen stagnation in the housing market, with recent data signalling that UK house prices fell by 0.4% in May 2025, reversing April’s modest 0.3% gain. This underlines the cautious but balanced economic outlook for the UK.